ALL BUSINESS: Be tough with your financial adviser

NEW YORK (AP) -- Your financial adviser might be acting like a doctor who prescribes certain medicine only because he's on a drug company's payroll and then neglects to tell you about it.

Not all brokers who sell stocks, bonds, annuities and other investments are required to put their clients' interests first. They can steer you into mutual funds or college savings plans that pad their firms' profits or their own commissions, and you might never know.

Congress has a chance to fix this conflicted system as part of the sweeping financial regulation bill now being reconciled between the House and the Senate. That is, if lawmakers don't buckle under pressure from brokers and their lobbyists.

"Congress is being pushed so hard by brokers not to change the rules. That should tell us exactly why they need to be changed," says Tamar Frankel, a law professor at Boston University who is an expert on fiduciary responsibilities that professionals have to their clients.

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More than ever, Americans need financial advice to direct them through all the options for retirement, college savings and more. Lots of people like to say they provide investment advice, but not everyone has to disclose conflicts of interest.

Those that do have an official name. They are known as "registered investment advisers." Under the 1940 Investment Advisers Act, they are considered fiduciaries, or trustees, for their clients and are obligated to put their clients' interest first.

As fiduciaries, they must disclose fees, disciplinary actions and potential conflicts of interests, such as the amount of money they get in commissions. They also must register with the Securities and Exchange Commission. The client also must be told if the adviser, or his firm, is getting paid by a particular mutual fund company to promote a certain product.

That's an entirely different situation from brokers, who buy and sell securities and other financial products on behalf of their clients.

Brokers can give financial advice, too, but they are only required to talk about "suitable" investments based on the finances of the client, and they don't have to disclose potential conflicts.

A broker, for example, can't pitch penny stocks to a 90-year-old widow living off a pension. But the broker can steer an investor into a mutual fund or variable annuity that pays a higher commission without telling the investor. Brokers also aren't required to disclose their own investment strategies, even if they differ from what is being recommended to the client.

"They can tell you about products that could meet your needs, but it shouldn't be assumed that they are the best products for you," says Scott Smith, associate director at Cerulli Associates, a financial research firm based in Boston.

A 2008 study commissioned by the SEC concluded that investors don't understand the distinction between the standard requiring advisers to put their clients' interests first, and those who only have to meet the less stringent "suitability" test. Most investors generally believe that financial professionals are acting in their best interest, the study found.

Congress will begin putting together a final bill on financial reform next week. There are still big gaps in how the House and Senate want to handle the disclosure of conflicts of interest for brokers.

The House bill would require the SEC to issue rules giving stock and insurance brokers the duty to act in their clients' interests. But that would only happen when brokers offer "personalized investment advice" to retail customers.

There are concerns that the language in the bill is too general and open to interpretation. A broker may act in a client's best interest when telling an investor how to allocate a portfolio, but then might not disclose conflicts of interest when peddling a specific product.

"You don't want brokers taking off their fiduciary hat and then putting on their sales hat," says Knut Rostad, a registered investment adviser at the Falls Church, Va.-based firm Rembert Pendleton Jackson and chairman of The Committee for the Fiduciary Standard, a professional group.

The Senate bill only requires the SEC to study gaps in the current regulations and then issue rules, if necessary.

Not surprisingly, the insurance industry and brokers favor the Senate bill.

Sheila Owens, a spokeswoman for the National Association of Insurance and Financial Advisors, says the SEC study from 2008 didn't go far enough in accessing the differences in oversight of investment advisers and brokers.

"We cannot support making changes that will affect consumers and the marketplace without first determining what steps are necessary to get it right," Owens said in an e-mail.

What she didn't say is that changing the rules will cost the industry more. Financial and insurance firms would have to offer clients more investment alternatives. Since fees and commissions would be disclosed, they could also lose sales if investors choose less expensive investments.